Why ASX 200 tech shares have outperformed today

Tech shares on the S&P/ASX 200 Index (Index:^AXJO) have made a big comeback on Thursday, leaving investors wondering if the…

| More on:
ASX 200 tech shares Investor touching a screen with a smiley face icon on it, indicating a surging ASX share price

Image source: Getty Images

Tech shares on the S&P/ASX 200 Index (Index:^AXJO) have made a big comeback on Thursday, leaving investors wondering if the beaten down sector has reached a turning point.

The ASX 200 tech share index surged by over 4% when the broader share benchmark “only” managed a gain of 0.5%.

Some of the best known tech names led the gains. The WiseTech Global Ltd (ASX: WTC) share price jumped over 7%, Appen Ltd (ASX: APX) share price added 6.2% and Xero Limited (ASX: XRO) share price rallied more than 5%.

ASX 200 tech shares are following the leader higher

ASX 200 tech shares have found favour today after the Nasdaq Composite (INDEXNASDAQ: .IXIC) delivered a strong showing last night.

The US tech composite gained 0.7% when the more general S&P 500 (INDEXSP: .INX) could only eke out a 0.3% advance.

The outperformance of our tech shares stand in sharp contrast to how they traded over the past year. Several of the one-time darlings are nursing big losses since January.

What has been eating ASX 200 tech shares?

This is largely because of US interest rate expectations. The Federal Reserve is poised to wind back its quantitative easing (QE) program. That’s also feeding expectations that it could start lifting interest rates sooner than expected.

The extra liquidity from QE and record low rates have benefitted risk assets. Any talk about these tailwinds being wound back will hit growth shares harder.

ASX 200 tech shares have essentially personified growth equity on our market. And it doesn’t help that our central bank is starting to take away the punch bowl from the party.

Australian rates could rise sooner than you’d think

The Reserve Bank of Australia is winding back QE, although it stated repeatedly that rates won’t rise till 2024.

But if the Fed raises rates soon, the RBA may be forced to sing a different tune. Such is the globalised world we live in where relative rates can be more important than actual rates.

Is the rally a dead cat bounce?

Given that the rate rise risk is not abating (in fact, some would argue it’s rising as the world can’t seem to shake inflation fears), is the recovery in ASX 200 tech shares a dead cat bounce?

Some would certainly argue this convincing point. But supporters of tech shares can take heart that there could be a more enduring reason for the rebound in the sector than just playing follow the NASDAQ leader.

If the risk of persistent inflation were to solidify further, the shares that tend to do best as those with pricing power.

A stronger tailwind for some ASX 200 tech shares

This means companies with a strong market position. They can increase prices without hurting demand for their products or services.

In many respects, some ASX 200 tech shares fit this bill. This is either because they have created such a “sticky” service where it would be costly or too inconvenient to swap to a rival. Or it may be because their offering is so innovative that nothing really comes close.

Mind you, not all of these shares have pricing power. And it isn’t a given that this trait would be enough to keep such shares rallying in the face of rate hikes.

Wondering where you should invest $1,000 right now?

When investing expert Scott Phillips has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for more than eight years has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

Scott just revealed what he believes could be the five best ASX stocks for investors to buy right now. These stocks are trading at near dirt-cheap prices and Scott thinks they could be great buys right now.

*Returns as of August 16th 2021

Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and has recommended Appen Ltd, WiseTech Global, and Xero. The Motley Fool Australia owns shares of and has recommended Appen Ltd, WiseTech Global, and Xero. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on Technology Shares